Wednesday, October 31, 2012

Private equity underwriters (PEU's) saddled affiliates with debt in order to pay huge dividends to the PEU parent: At least that's the pattern for 2012, according to Pensions & Investments:

LBO shops (private equity underwriters) have taken out 91 cents in dividends for every dollar of capital they've invested this year.

It's not just traditional debt being added to affiliate balance sheets.

Risky types of debt unseen since last decade are resurfacing, such as
PIK-toggle notes. PIK-toggles, which NBTY used to finance its dividend
to Carlyle, are bonds that allow borrowers to delay payments to
creditors in exchange for increasing their debt load. The default rate
for companies that use this form of financing is double the rate of
similar companies, according to Moody's.

The Carlyle Group bled numerous affiliates for dividends. Carlyle co-founder David Rubenstein has been fearless in liquidity recaps. It's but one of many ways PEU's rake it in.

Tuesday, October 30, 2012

Each speaker was called on to say how he or she had exhibited the conference’s main theme:Fearlessness

Rubenstein's fearlessness has been on display many times on PEU Report. He showed his massive cojones for demanding Congress keep his preferred PEU tax status, doing so multiple times. He fearlessly accepted incredibly lax credit terms for PEU deal financing, later making the analogy to sex and everyone's inability to say no.

David Rubenstein was fearless in
holding onto Texas taxpayer money for jobs promised by Vought Aircraft
Industries. For six years Carlyle affiliate Vought held onto $35
million, providing none of the promised 3,000 new jobs. Fearless....

Sunday, October 28, 2012

Presidential hopeful Mitt Romney's private equity underwriter (PEU) background is clear from his stint at Bain Capital. However, Romney's Chief Economic Advisor Glenn Hubbard has his own PEU history.

Since 1994 Glenn served as the Russell L. Carson Professor of Economics and Finance at Columbia University's Graduate School of Business. Russ Carson is a founder of Welsh, Carson, Anderson & Stowe. a private equity underwriter specializing in health care and information/business services. Romney's economic advisor has been PEU sponsored for eighteen years.

WCAS was founded in 1979, a time when U.S. manufacturers were being trounced by the Japanese. Dr. W. Edwards Deming, an American taught the Japanese about quality. Deming's System of Profound Knowledge, which consisted of systems theory, understanding variation, knowledge (how do we know what we know?), psychology (what demotivates people) and interactions between the four areas.

In 1984 Dr. Deming lamented takeovers and leveraged buyouts (LBO's) as the antithesis of his teachings and highly damaging to constancy of purpose . LBO's were re-branded private equity, where Mitt Romney later cut his "management" teeth. Romney's history in job elimination and shipping jobs overseas mirrors that of other PEU's.

"Unemployment is not inevitable. It is a sign of bad management."--Dr. W. Edwards Deming

Deming also stated knowledge is prediction. Hubbard advised President George W. Bush on his 2001 tax cuts and made a number of predicitons:

On August 22, 2001, Hubbard published an article in the Wall Street Journal
entitled "Tax Cuts Won't Hurt the Surplus."

In the article,
Hubbard also predicts that his tax cuts would preserve the Clinton
budget surpluses by causing GNP to grow 0.3% per year faster.

Tax cuts benefited the PEU class in the last decade, which saw explosive growth in private equity.

Over half of the benefits of the Bush-Hubbard tax cuts went to the top
1% of the population. In part to benefit the wealthy, the tax cuts were
also structured to reward investment in financial assets, rather than
either consumer spending or real capital investment. As a result, the
tax cuts caused huge budget deficits, yet did little to stimulate growth
or job creation: There were basically no new jobs created during the
Bush administration, despite adding trillions to the national debt.

Mr. Hubbard has been a director of KKR Financial since October 2004. He is currently a director of ADP, Inc., BlackRock
Closed-End Funds and MetLife,
Inc. He was
previously a board member of Capmark Financial, Duke Realty Corporation,
Ripplewood Holdings, RH Donnelly
and Information Services Group, Inc.

Election talk has little to do with the way either party governed the last decade. Reds and Blues compete for the right to steer trillions in government spending to their friends, as they dole out tax goodies. Red and Blue love PEU...

Tuesday, October 23, 2012

Wired reported on Mitt Romney's Naval advisor, John Lehman and his PEU ties.
The piece exposed Lehman's profits from shipbuilding deals, the public version. However, they missed Lehman's role with a number of private companies. The following made Lehman's EnerSys board bio in 2008.

This was prior to the fall 2008 financial crisis, which took out a number of marginal companies, especially those highly levered. Here's the odd thing, the EnerSys bio below Lehman's belongs to Ray Mabus, the current Secretary of Navy under President Obama.

He has served on the boards of TI Group plc, Westland Helicopter plc,
Sedgwick plc and many of JFLCO’s realized investments. He currently is a
director of Ball Corporation, ISO Inc., EnerSys, JFL DMH Partners, LLC
(“Drew Marine”).

Did Lehman have any connections to Cleveland Ships LLC, a mysterious company interested in buying Northrop Grumman's shipbuilding business? Northrop spun the division off as Huntington Ingalls Industries Inc., which has a close connection to Lehman's PEU.

Thomas Fargo is Chair of Huntington Ingalls and "Member of Operating Executive Board at J.F. Lehman & Company." Fargo is a Managing Director of J.F. Lehman.

J.F. Lehman lists eighteen companies in its portfolio, however only six are current investments. Last year it closed on a $575.5 million fund JFL Fund III. The press release stated:

J.F. Lehman & Company focuses exclusively on
the defense, aerospace and maritime industries and the technologies that
originate from them. This investment strategy reflects the firm's deep
experience in and commitment to these sectors for nearly two decades.
Consistent with the firm's historical investment program, the funds will
focus on control ownership positions in leveraged acquisitions of high
quality companies in the firm's target industries in the United States
and the United Kingdom. JFL Fund III has completed one acquisition to
date: the June 2011 investment in US Joiner, a leading provider of
end-to-end marine joiner and related shipbuilding solutions for U.S.
Government and commercial customers. The firm has offices in New York and Washington, D.C.

During the uranium enrichment process, depleted uranium hexafluoride (UF6), or “tails”, are created as a by-product.

The tails have potential for future re-enrichment and Urenco
currently stores UF6, pending future re-enrichment or de-conversion for
long-term storage.

Urenco USA began operations in June 2010, according to its website. It's over a third of the way to its stated production goals

It is anticipated that at full capacity the facility can produce
sufficient enriched uranium for nuclear fuel to provide approximately
10% of America’s electricity needs.

Carlyle co-founder David Rubenstein likes disequilibrium, which applies to uranium enrichment given Japan's Fukushima and the international concern over Iranian enrichment. China wants foreigners to train them, while Russia ponders opening up their enrichment to western companies.

Emerging markets such as the Middle East, India, China and South East Asia represent key opportunities in the coming decades. They can more than replacefalling demand from those countries that have decided to phase out nuclear power.

What if someone knew Iranian nuclear enrichment capabilities would be destroyed and any new regime had to rely on the West to fuel their nuclear plants? That kind of insider information would be worth billions to an opportunistic investor..

As for the notion that private equity helps companies "manage better," Urenco's stellar results and outstanding outlook are below.

Could this be a timely theme? Nefarious private equity firm takes over nuclear enrichment firm; global havoc follows..It would follow another compelling story involving Urenco, the tragic accident of the Dutch Prince, the company's CFO. Either are compelling story lines...

Update 11-14-12: Fitch downgraded Urenco from "A" to "A-" due to balance sheet deterioration and a dividend increase.

Update 3-16-14: Another uranium producer USEC filed for bankruptcy. Uncle Sam will recapitalize the new USEC via $241 million in funding for a new production facility. The Energy Department is paying for 80% of the new facility in Ohio.

Saturday, October 20, 2012

The Carlyle Group, now publicly traded, is run by three of its original co-founders. Two co-founders stood front and center this week in the business media.

Carlyle Group co-founder William Conway said relations between buyout firms and investors “have passed their nadir.” This came after an investor dressed down Conway for private equity's fee fractal. Bloombergreported:

Oxford University’s investment chief attacked private-equity funds’ charges, saying firms such as Carlyle Group LP (CG) are more interested in collecting fees for managing money than generating top returns for their backers.

“The resources and expenses investing through limited partnership
structures is a pain in the backside,” she said. “It is as if you make
it deliberately hard for us, you make it hard to get in, the tedious
fundraising process, the fight for allocations, the pain of partnership
documents, the fees. And not just the headline figure, all the tricks we
have to look out for such as transaction fees, monitoring fees, fees
for paying the fees for your software licenses, fees for visiting
limited partners. Come on guys, pay your own bills.”

Private equity gets preferred taxation on carried interest. Carlyle's co-founders are on record as hating taxes, which was the subject addressed
by co-founder, David Rubenstein, the firm's public face.. CNBCreported:

“The most important thing the next president has to do is resolve the
uncertainty of the debt and deficit,” Rubenstein said, adding that it
was impossible to predict whether either President Barack Obama or
Republican nominee Mitt Romney would be better for the economy.

“You make most of your money when you’re doing things in an uncertain
environment,” he said. “So disequilibrium is the kind of thing that
people like us like.”

How many Carlyle funds is Rubenstein marketing at the moment? It was kind of Andrew Ross Sorkin and CNBC to give him free aim time. Rubenstein used it to give a basic description of private equity, so people could understand Mitt Romney's background. Joe Kernan lobbed a softball question on what PEU's need tax policy wise to invest in U.S. companies and keep jobs here: Rubenstein replied:

1. Certainty - we need to know what the tax policy will be for the next couple years.

One thing's certain, Rubenstein worked hard on Capital Hill the last six years to keep private equity's preferred taxation on carried interest.

2. Certain incentives would also be valuable.

Rubenstein knows how to milk Uncle Sam's trillions in annual spending. It pulled out of bidding on Virginia's ports after finding the expectation that it would need to pay much higher local taxes.

3. Opportunities to manufacture in the U.S. at lower prices than people thought was the case.

This comes as result of direct and indirect government subsidies, as well as dumping worker pension funds.

4. Capital gains taxes will likely be higher in any budget deal, but lower than they've been for the last decade or so.

The Bush tax cuts went into effect in 2001. So for the last decade, the capital gain rate has been 15%. That's the same rate PEU partners are charged on their investment returns, known as carried interest. The Carlyle Group is a virtual nonprofit, like a church or safety net hospital.

Tuesday, October 9, 2012

Carlyle Group co-founder David Rubenstein dined with Treasury Secretary Tim Geithner last Thursday. He then joined ex-Treasury Secretary Larry Summers at the Nantucket Project. Convicted felon Jack Abramoff opened the session. Oddly, the last case involving Carlyle's bribing New York pension officials reached a verdict. Bloomberg reported:

Loglisci pleaded guilty to a single count of the criminal
indictment involving the Carlyle/Riverstone Global Energy and
Power Fund II.

Carlyle and Riverstone settled for a combined $70 million. Justice or "Just Us" PEU mavens? The panel suggests the latter.

Friday, October 5, 2012

Not any more. Billionaire Rubenstein is a hot ticket in D.C. His list of rainmakers evolved since the Baker-Bush days. The 2010 Carlyle Group investor meeting had Madeleine Albright and Colin Powell. Capital Hill and the White House have a back door for Rubenstein to enter. Rubenstein, the penultimate power player in power-addicted town, seeds the next crop of faces to impress investors. He had an Axelrod and employs a Frist. How long before he has an Obama or Romney?

Thursday, October 4, 2012

One item got little play in numerous stories about The Carlyle Group's investment in commodity player Vermillion Asset Management:

Today, Vermillion manages three commodities-focused strategies,
including relative value, enhanced index and long-biased physical
commodities. Each strategy utilizes Vermillion’s ability to make and
take physical delivery, unique among its peer group.

Carlyle co-founder William Conway hates a level playing field. How will Carlyle/Vermillion tilt the commodity field in its favor?

The good part, William, is that, no matter whether our clients make money or lose money, Duke & Duke get the commissions.

Take the "million" out of Vermillion and substitute "min." That spells vermin, which leads to the rat portion of Carlyle's growth. Vermillion has $2.2 billion in commodity assets under management. Carlyle wouldn't add TCW's $127 billion in assets to Carlyle's $156 billion. Add the three together and it totals $285.2 billion under management. How might Carlyle's financial muscle corner commodities? Stay tuned.

Tuesday, October 2, 2012

PEU ubiquitization will be complete when individuals saving for their retirement can invest in private equity. Bloombergreported:

David Rubenstein, co-founder of the buyout firm Carlyle Group LP (CG),
said ordinary savers may someday be able to invest with firms like his,
a business that so far has been limited to wealthy individuals and
institutions.

Savers would be better off putting some of their
retirement money into leveraged buyouts and other alternative-investing
opportunities because they often produce higher returns than the public
markets, Rubenstein said in an interview with Arthur Levitt that aired
yesterday on Bloomberg Radio.

“I think it will be possible in the
future where 401(k) check-off plans will be able to say you can take a
certain amount of your money a year and go into an illiquid private-
equity fund,” said Rubenstein, 63. “However, they shouldn’t be able to
put too much of their money into anything that is illiquid.”

The billionaire boys final cash in could come at the wallets of little people. The irony would come if workers needed greater returns because their PEU owner eliminated the pension benefit for employees. It's but a matter of time before such a thing happens in the global PEU greed fractal.

Insider Architect of the Implosion

"I had a choice. I could be an insider or I could be an outsider. Outsiders can say whatever they want. But people on the inside don’t listen to them. Insiders, however, get lots of access and a chance to push their ideas. People — powerful people — listen to what they have to say. But insiders also understand one unbreakable rule: They don’t criticize other insiders."--Larry Summers, Ph.D.

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